Government mismanagement is bleeding Ontario dry: Philip Cross in the Financial Post

Ontario has diverted away from adopting the business-friendly policies that are the only real way to resuscitate economic growth. Instead, writes Philip Cross, Canada’s largest province is focusing on running large deficits and smothering business investment.

By Philip Cross, May 13, 2016

Statistics Canada this week released its snapshot of investment plans for 2016. Overlooked in the hype over reports about meaningless economic gyrations, it may be the most important data Statistics Canada produces. Business investment is the foundation of long-term economic growth. It foretells our industrial structure for years to come and is a major driver of productivity growth. The Bank of Canada has identified non-energy exports and business investment as keys to a resumption of stronger economic growth. Investment itself helps determine how much manufacturing exports rebound.

The results for 2016 weren’t pretty. Businesses plan to cut investment 6.5 per cent on the heels of a 10.3 per cent drop in 2015. The bulk of the decline in capital spending was in the oil and gas industry, which was widely forecast and could hardly be avoided given the nosedive in oil prices.

However, the second-largest source of weaker investment was manufacturing, the sector that was supposed to benefit from a lower exchange rate and revive national growth.

A closer look at the provincial distribution of business capital spending is revealing. Ontario, Canada’s industrial heartland and home to nearly half of factory investment in 2006 (those allegedly deep, dark days of Dutch disease), saw investment plans stall due to a cut by manufacturers and continued weakness in finance. The auto industry dominated the drop for factories. Manufacturing investment in Ontario had been buoyed in 2015 by the extensive retooling of several auto plants. While this is significant in terms of securing future output at these plants, this was a one-time boost to growth, while new “greenfield” investments in auto plants continue to migrate south. Overall, manufacturers in Ontario plan $6.6 billion of capital outlays in 2016, well below the $8 billion average before the recession.

Overall, manufacturers in Ontario plan $6.6 billion of capital outlays in 2016, well below the $8 billion average before the recession.

Ontario’s industrial structure continues the decade-long shift from its traditional pillars of manufacturing and finance to government-directed investments in transportation and utilities. Before the recession, capital spending by manufacturing and finance reached $18.3 billion. Now, they total half that. In their place, investment in transportation and utilities has doubled from $10 billion to $20 billion. Instead of world-class factories and banks, Ontario now invests in mass transit and green-energy projects, mostly dictated by government.

Next door in Quebec, the picture is much rosier with businesses planning an 8.4 per cent capital-spending boost. The increase was led by manufacturing, despite the troubles at Bombardier that weakened capital spending in the aerospace industry. Total factory investment in Quebec surpassed $4.2 billion, easily exceeding its pre-recession average. Mining also posted impressive gains despite continued weak commodity markets. These are strange days indeed for Ontarians, who now look with envy at the healthy combination of more business investment and less intrusive government in their once quarrelsome neighbour.

Instead of world-class factories and banks, Ontario now invests in mass transit and green-energy projects, mostly dictated by government.

The contrast between business investment in Quebec and Ontario shows that the billions poured into government infrastructure and green-energy projects has not “kick-started” Ontario’s business investment as the government hoped. In fact, the high taxes and electricity rates needed to pay for these schemes seems to be driving investment out of Ontario, especially from its manufacturing core. Slumping investment is hardly surprising since business confidence in Ontario is the lowest in Canada, with only 30 per cent of firms saying the province is headed in the right direction. Not even a lower dollar has made it worthwhile for firms to expand. Instead, Ontario’s building a magnificent transportation infrastructure to carry imported goods that used to be made here and to ferry commuters to jobs that will not materialize as long as business investment flounders.

Kathleen Wynne’s grand economic scheme consists mostly of expanding the reach of the public sector, raising taxes and hydro rates, and bribing firms to tolerate the quagmire (the Ontario auditor general gave up trying to map the maze of subsidies offered to firms). Constantly looking to Ottawa for solutions to its economic disappointment, hoping for more transfers or a lower exchange rate, diverted Ontario from focusing on the business-friendly policies that are the only real way to resuscitate economic growth. The result is that Ontario now resembles the Toronto Maple Leafs of economic development—a perennial also-ran. Only it has traded away its future draft picks by running large deficits and smothering business investment.

Philip Cross is the former chief economic analyst at Statistics Canada

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